Insurance Policy Death Benefits and Cash Values

Term or permanent life insurance is one of the most common ways to fund an estate plan. The capacity to transfer the financial risk of loss of income or the burden of inheritance taxes to an insurance company in exchange for paid-in premiums is provided by purchasing a life insurance policy.

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When a transfer of risk happens, life insurance companies provide two main benefits to insured individuals: death benefit payments and cash value savings. The death benefit is the sum paid to the insured's beneficiaries when he or she dies, whereas the cash value balance is a forced savings component available to the insured while he or she is still alive.

TAKEAWAYS IMPORTANT

• Life insurance products provide a death benefit to the insured's beneficiary as well as a cash value savings component that the policyholder can use while still living.
• A death benefit is a tax-free payment made to a beneficiary named by the insured after the latter has died; the benefit is paid as long as the policy is active and all premiums have been paid.
• Permanent life insurance plans contain a cash value savings component; the cash value is what's left after the cost of insurance and other fees have been subtracted from the money paid in premiums.
• The insured can obtain financial value while they are still living by surrendering a portion of the policy or taking out a policy loan.
• Unless a rider has been obtained to allow it to be included to the death benefit, whatever amount of the cash value has not been used at the time of the policyholder's death is lost to the insurance company.

Death Benefit from Life Insurance

A life insurance policy is often purchased to ensure that a death benefit is paid to the insured's survivors when he passes away. As long as the policy is in place and premiums are paid, insurance companies will pay a total death benefit in the amount determined by the insured. Once the insurance company is notified of the insured's death, the death benefit is paid to named beneficiaries as a tax-free transfer, and the beneficiaries are free to spend the cash.

Cash Value of Life Insurance

Permanent life insurance products, such as whole life or universal life, allow policyholders to accumulate savings within the policy's cash value. The entire amount of premiums paid minus the cost of insurance and other costs charged by the carrier equals the cash value of a life insurance policy. Cash value balances can also fluctuate depending on the underlying investment to which they are assigned. Cash value balances, unlike death benefits, are available to the insured or owner of a life insurance policy while he is still alive, either through partial surrender or policy loan. Unless a particular rider has been obtained to allow it to be added to the death benefit, any residual cash value when the insured dies is forfeited to the insurance company.